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Must-know: Bloomberg Consumer Comfort index slips considerably

The Bloomberg Consumer Comfort Index slips to –29.7 for the week ending October 6

The Bloomberg Consumer Comfort Index is a weekly sentiment index that covers three critical variables: respondents’ perception of the state of the economy, their evaluation of their personal finances, and whether it’s a good time to purchase goods and services. The index is a random sample of 1,000 people conducted through telephone interviews with relatively straightforward questions. Are the state of the economy, personal finances, and time to buy goods and services excellent, good, not so good, or poor? Since the index started in 1985, it has averaged -16, so “neutrality” isn’t necessarily zero. The highest reading the index ever recorded was +38 in early 2000. The index bottomed at -54 in 2008.

Big tick downward in perception of the economy

While the report is on balance negative (not surprising, given that the index itself is negative), perceptions of the economy are highly negative (20% positive versus 80% negative), as well as the perception of whether it’s a good time to buy (33% positive versus 67% negative). As to personal finances, the index stayed the same: 52% positive versus 48% negative. So when you ask consumers about the world around them, they tend to be more negative, whereas when you ask about their own personal situation, they’re more neutral. All three sub-indices have been falling, and it appears that higher interest rates are beginning to flow through to the real economy.

It seems that the rebound in real estate prices is helping homeowners, as the economic sentiment between owners and renters is rather large. Overall, it’s surprising that the economic sentiment is so poor given that the S&P 500 (Standard & Poor’s index) is at record highs and real estate is appreciating at a high single-digit pace. Perhaps this is driven by quantitative easing, and maybe there’s a disconnect between the big multinationals and Main Street. While the index has only existed since 1985, it seems that it took quite a while to rebound from the ’91–’92 recession as well. Perhaps sentiment is even more of a lagging indicator than unemployment.

Implications for homebuilders

Consumer sentiment is a critical factor in risk-taking. In fact, KB Home (KBH) in its recent earnings conference call cited consumer confidence as a more important variable than interest rates. Despite the negative sentiment, homebuilders have experienced quite the renaissance over the past year, as the Homebuilders ETF (XHB) has risen smartly. Rising real estate prices seem to be driving increases in orders. As sentiment improves, renters will begin to become more comfortable with the idea of homeownership. Student loan debt remains a problem for the first-time homebuyer, but even the first-time homebuyer seems to be reappearing. Given that the cost of renting is way higher than the cost of owning, a change in sentiment should cause a big spike in new orders. Housing starts have been highly depressed since the real estate collapse. Even a marginal increase in demand should drive homebuilders forward. Specific homebuilder stocks that will be positively affected by changes in consumer sentiment include KB Home (KBH), Lennar (LEN), NVR Homes (NVR), Standard Pacific (SPF), and Toll Brothers (TOL).